ENG-1981 — Page 80

A

FINANCIAL SYSTEM AND ECONOMY

51

moneylenders - all of which are relatively small in terms of the local markets. As part of a continuing process designed to apply effective controls to these various non-bank financial services, work continued during the year on hire-purchase legislation and on amendments to the Pawnbrokers Ordinance.

Financial Markets

Domestic Money Market

The domestic money market in Hong Kong is not a ‘market' in the sense of a trading floor the phrase is used to refer to the activities of banks and deposit-taking companies engaged in raising or placing Hong Kong dollar funds between themselves. There are a few large commercial companies which also place funds directly on the money market. The demand for funds on the money market comes principally from those institutions (mainly the local branches of banks incorporated outside Hong Kong), which do not have an adequate Hong Kong dollar deposit base to support their Hong Kong dollar lending.

Virtually all transactions in the domestic money market were in the form of straight deposits until 1977. In that year, the issue of Hong Kong dollar certificates of deposit began to develop and these are now quite widely used by some banks as a means of raising Hong Kong dollar resources. As at December 31, 1981, Hong Kong dollar certificates of deposit totalling about $3,542 million in value were outstanding, of which amount some $1,912 million was held by licensed banks and deposit-taking companies.

The Mass Transit Railway Corporation has continued to make use of its commercial paper facility, which was developed in 1979. The paper takes the form of negotiable bills of exchange accepted by the MTRC.

There is no marketable direct government debt. The only direct government debt now outstanding is due to the Asian Development Bank, and amounted to the equivalent of $250 million at March 31, 1981. There is a small amount of marketable government- guaranteed debt, comprising $400 million of 10-year bonds and $207 million of five-year notes issued by the Mass Transit Railway Corporation, and $150 million of notes issued by the Hong Kong Building and Loan Agency Limited.

Foreign Exchange Market

An important feature of the domestic money market is its very close connection with the for- eign exchange market in Hong Kong. This connection arises because the shortage of money market instruments denominated in Hong Kong dollars – and, in particular, the absence of marketable government debt, such as Treasury Bills - means that the residual liquidity of banks and deposit-taking companies has to be held in foreign currency assets, principally claims on banks overseas. In addition, the ability to buy Hong Kong dollars against the sale of a foreign currency balance, enables a bank in Hong Kong without an adequate local deposit base to acquire the resources to lend to a customer in Hong Kong, if it cannot borrow those resources at an acceptable rate of interest on the domestic money market.

There is no exchange control at all in Hong Kong, and a number of banks and deposit-taking companies are very active participants in the foreign exchange market, with many international banks dealing (through their local branches) on behalf of their other branches round the world during the hours that the Hong Kong market is open. The government does not often intervene in the foreign exchange market to influence the exchange value of the Hong Kong dollar, although it does occasionally seek to smooth out erratic fluctuations in the Hong Kong dollar exchange value. The issue of US dollar